News & ASX Releases

Castello Update

July 26, 2010

Summary

On 29 April 2010, the company advised the market that the Castello well
(Vitalba-1dir) was experiencing a faster than anticipated decline in
wellhead pressure and outlined plans to conduct downhole pressure
measurements to investigate. The company further indicated that the
pressure decline observed could lead to lower production rates than
previously projected and substantially reduced reserves.

Over the last 3 months Po Valley has completed the additional pressure
testing and engaged independent experts to analyse the results and
define additional development options for the field. In parallel we have
reviewed the reservoir data on the Agnadello-1 well, 400m south of
Vitalba-1dir.

The results of the test work and evaluations present a new
interpretation of the Castello Vitalba-1dir well and the field
development options.

Key conclusions of the study are:

Production from the existing perforated level in Vitalba-1dir will
be limited to 3,000-5,000 cubic metres per day and remaining reserves
are small at 3.2 million cubic metres (0.1bcf)

Probable reserves of 100.7 million cubic metres (3.6 bcf)
remain in the updip (or attic) position of the Agnadello-1 well.
Recovery of these reserves will require identification and successful
drilling of a new Vitalba-1dirA well

2P reserves from the field are now estimated at 103.9 million
cubic metres (3.66 bcf), down 42% from the previously estimated reserves
of 178 million cubic metres (6.3 bcf).

Work completed

During May and June three rounds of test work and interventions were
completed on the Vitalba-1dir well. The first downhole test work
identified water incursions in the deepest level and this level was shut
off using a cement plug leaving the shallower level open. On start up,
initial flows from this level were limited to around 4,000-5,000 cubic
metres per day and the initial hypothesis was that this was a result of
poor perforations in this level.

Subsequent test work completed in late June and interpreted in early
July indicated that the poor performance of the shallow level was a
result of poor reservoir characteristics and that new perforations would
be unlikely to improve well performance.

The new result when analyzed in conjunction with the original production
history of the Agnadello-1 well strongly suggested that contrary to the
development geological model, the gas bearing levels perforated in
Vitalba-1dir were separate and not linked to Agnadello-1. Further the
results from evaluations indicate that the original gas “attic reserves”
of Agnadello-1 remain in place and have not yet been accessed or
produced from in the Vitalba-1dir well.

Revised geological and reservoir structure

These conclusions present a different geological and reservoir model.
The pre production model assumed that the sand levels intersected by
Vitabla-1dir were correlated with the San A1 and San A2 levels.

New reservoir and geological interpretation work completed by the
University of Turin (Dedicated Reservoir Engineering And Management)
concluded that:

The Vitalba-1dir gas bearing sands are distinct and hydraulically separated from the original Agnadello-1 production levels

Production from the existing perforated level in Vitalba-1dir
will be limited to 3,000-5,000 cubic metres per day and remaining
reserves are small at 3.2 million cubic metres (0.1bcf)

Probable reserves of 103.9 million cubic metres (3.66 bcf)
remain in the up dip (or attic) position of the Agnadello well and can
be accessed through a new well.

New Model

Action Plan

We have carefully analyzed the findings of the new independent report and concur with the new interpretations. The plan is to:

Purchase additional seismic lines from ENI to identify an optimum new well
location

Drill a new well, Vitalba-1dirA, deviated from the current
Castello plant location. Estimated cost of deviated well is around €2.5
million

Connect Vitalba-1dirA to the existing Castello plant and commence production.

The Vitalba-1dirA well, as a second contingent well, is approved in the
development plan for Castello and steps to achieve environmental and
Ministry approval of the well are underway. We expect final
authorisation by 2Q 2011. Production will continue at Vitalba-1dir at
approximately 4,000 cubic metres per day.

Revised Reserves and Production Profile

Based on the new interpretation, probable reserves from the field are
estimated at 103.9 million cubic metres (3.66 bcf) down 42% from the
previously reported reserves of 178 million cubic metres (6.3 bcf). The
key uncertainty lies with the location and resulting effectiveness of
the new deviated well in recovering the reserves. Based on simulations,
in the success case for Vitalba-1dirA production is expected to start at
an estimated 50,000-70,000 cubic metres per day.